The January 2008 Senior Loan Officer Opinion Survey on Bank
Lending Practices addressed changes in the supply of, and demand for, bank
loans to businesses and households over the past three months.1 Special questions in the survey
queried banks about changes in terms on commercial real estate loans during
2007, expected changes in asset quality in 2008, and loss-mitigation strategies
on residential mortgage loans. In addition, the survey included a new set of
recurring questions regarding revolving home equity lines of credit. This article
is based on responses from fifty-six domestic banks and twenty-three foreign
banking institutions.

In the January survey, domestic and foreign institutions
reported having tightened their lending standards and terms for a broad range
of loan types over the past three months. Demand for bank loans reportedly had
weakened, on net, for both businesses and households over the same period.

C&I Lending

(Table 1, questions 1-6; Table 2, questions 1-6)

In the January survey, one-third of domestic institutions—a
larger net fraction than in the October survey—reported having tightened their
lending standards on C&I loans to small as well as to large and
middle-market firms over the past three months. Significant net fractions of
respondents also noted that they had tightened price terms on C&I loans to
all types of firms, including raising the cost of credit lines and the premiums
charged on riskier loans over the survey period. About two-fifths of domestic
banks—a higher net fraction than in the October survey—reported having increased
spreads of loan rates over their cost of funds over the previous three months.
Smaller net fractions of domestic banks also indicated that they had tightened
non-price terms on C&I loans to all types of firms.

Compared with domestic institutions, larger net fractions of
U.S. branches and agencies of foreign banks reported having tightened lending
standards and terms on C&I loans. About two-thirds of foreign banks—up
from one-third in the October survey—noted that they had tightened their
lending standards on C&I loans over the past three months, and large
majorities also reported that they had tightened selected price terms for such
loans. About 85 percent of foreign banks—a higher net fraction than in the
October survey—indicated that they had increased spreads of loan rates over their
cost of funds over the past three months.

Large majorities of domestic and foreign institutions that
reported having tightened lending standards and terms on C&I loans over the
past three months pointed to a less favorable or more uncertain economic
outlook, a worsening of industry-specific problems, and a reduced tolerance for
risk as reasons for their more-restrictive lending policies. Smaller but
significant fractions of domestic and foreign respondents noted that a
deterioration of their banks’ current or expected capital or liquidity
positions had contributed to the tightening of lending standards and terms over
the past three months.

On net, large domestic banks reported that demand for
C&I loans from large and middle-market firms was about unchanged over the
past three months, whereas about 35 percent of small domestic banks, on net,
reportedly experienced weaker demand for C&I loans from these firms. About
one-fourth of both large and small domestic banks, on net, also saw weaker
demand for C&I loans from small firms. Finally, about 40 percent of
foreign institutions reported weaker demand, on net, for C&I loans over the
past three months.

Very large majorities of domestic institutions that
indicated a weakening of loan demand pointed to a decrease in customers’ needs
to finance inventories and investment in plant and equipment. In addition, 70
percent of domestic banks and all foreign respondents cited a decrease in
customers’ needs for merger and acquisition financing as a reason for lower
demand for C&I loans. Regarding future business, about 20 percent of
domestic and 50 percent of foreign respondents, on net, reported that the
number of inquiries from potential business borrowers had decreased over the
previous three months.

Commercial Real Estate Lending

(Table 1, questions 7-10; Table 2, questions 7-10)

About 80 percent of domestic banks reported tightening their
lending standards on commercial real estate loans over the past three months, a
notable increase from the October survey. The net fraction of domestic banks
reporting tighter lending standards on these loans was the highest since this
question was introduced in 1990. About 55 percent of foreign banks—up from
about 40 percent in the October survey—indicated that they had tightened their
lending standards on such loans. Concerning loan demand, about 45 percent of both
domestic and foreign respondents, on net, reported weaker demand for commercial
real estate loans over the past three months.

As in past years, the January survey queried banks about
changes in their lending terms on commercial real estate loans over the
previous twelve months. The responses to these special questions indicated
that considerable net fractions of banks had tightened terms on commercial real
estate loans in 2007; in contrast, in last year’s survey, banks reported that
they had eased lending terms, on net, in 2006. In the latest survey, about 55
percent of domestic respondents and 45 percent of foreign respondents noted
that they had required higher debt service coverage ratios and lower
loan-to-value ratios on commercial real estate loans in 2007. In addition,
about 40 percent of domestic banks and 50 percent of foreign banks indicated
that they had reduced the maximum loan sizes that they were willing to grant
over the past twelve months. About 45 percent of domestic banks and 75 percent
of foreign banks reported raising loan rate spreads over their cost of funds in
2007.

A large number of domestic and foreign respondents pointed
to a less favorable economic outlook and to a worsening of the conditions of,
or the outlook for, commercial real estate in the markets where their banks
operate as reasons for tightening terms on commercial real estate loans in
2007. In addition, a large fraction of domestic banks noted a reduced
tolerance for risk, whereas foreign banks indicated that reduced liquidity of
the securities collateralized by these types of loans was an important factor.

Lending to Households

(Table 1, questions 11-20)

In the January survey, significant numbers of domestic
respondents reported that they had tightened their lending standards on prime,
nontraditional, and subprime residential mortgages over the past three months;
the remaining respondents noted that their lending standards had remained
basically unchanged. About 55 percent of domestic respondents indicated that
they had tightened their lending standards on prime mortgages, up from about 40
percent in the October survey.2
Of the thirty-nine banks that originated nontraditional residential mortgage
loans, about 85 percent reported a tightening of their lending standards on
such loans over the past three months, compared with about 60 percent in the
October survey.3
Finally, five of the seven banks that originated subprime mortgage loans noted
that they had tightened their lending standards on such loans, a proportion
similar to that in the October survey.4

About 60 percent of domestic
respondents, on net, indicated that demand for prime residential mortgages had
weakened over the past three months, and 70 percent of respondents, on net,
noted weaker demand for nontraditional and subprime mortgage loans over the
same period. The net fractions reporting weaker demand for each of the three
types of mortgage loans increased relative to the October survey.

About 60 percent of domestic respondents indicated that they
had tightened their lending standards for approving applications for revolving
home equity lines of credit over the past three months. Regarding demand, about
35 percent of domestic banks, on net, reported that demand for revolving home
equity lines of credit had weakened over the past three months.

About 10 percent of respondents—up from about 5 percent in
the October survey—reported that they had tightened their lending standards on
credit card loans over the past three months. About 30 percent of respondents
noted that they had reduced the extent to which such loans were granted to
customers who did not meet credit-scoring thresholds; smaller net fractions
also indicated an increase in minimum required credit scores and a reduction of
credit limits on credit card loans. About 15 percent of domestic banks—up from
about 5 percent in the October survey—indicated a diminished willingness to
make consumer installment loans relative to three months earlier. About one-third
of domestic banks—up from about one-fourth in the October survey—reported that
they had tightened their lending standards on consumer loans other than credit
card loans. Significant net fractions of banks also noted that they had
tightened lending terms and conditions on such loans. In particular, domestic
banks had increased minimum credit scores, reduced the extent to which such
loans were granted to customers who did not meet credit-scoring thresholds, and
widened spreads of loan rates over their cost of funds. Regarding loan demand,
about 35 percent of domestic institutions, on net, indicated that they had
experienced weaker demand for consumer loans of all types.

Special Questions on the Outlook for Loan Quality in 2008

(Table 1, questions 21-22; Table 2, question 11)

A set of special questions asked banks about their
expectations for delinquencies and charge-offs on loans to businesses and
households in 2008 under the assumption that economic activity progresses in
line with consensus forecasts. On balance, the responses indicate that large
majorities of domestic and foreign banks expect a deterioration in loan quality
in 2008. Regarding loans to businesses, between about 75 percent and 85
percent of domestic and foreign banks expect a deterioration in the quality of
their C&I and commercial real estate loan portfolios. About 15 percent of
domestic and 20 percent of foreign respondents expect a substantial
deterioration in the quality of their commercial real estate portfolios.
Concerning residential real estate loans, between about 70 percent and 80
percent of domestic respondents expect the quality of their prime,
nontraditional, and subprime residential mortgage loans, as well as of their
revolving home equity loans, to deteriorate in 2008. Finally, about 70 percent
of domestic respondents expect a deterioration in the quality of both credit
card and other consumer loans.

Special Questions on Loss-Mitigation Strategies on
Residential Mortgage Loans

(Table 1, questions 23-24)

A final set of special questions queried domestic
respondents about strategies that they expect their banks to employ in order to
mitigate a potential deterioration in the credit quality of their bank’s residential
mortgage loan portfolio or of the mortgage loans that their banks service for
others. More than 85 percent of respondents indicated that they expect
loan-by-loan modifications based on individual borrowers’ circumstances to be
at least a somewhat significant loss-mitigation strategy at their banks. More
than 65 percent of respondents also anticipate steps—such as short sales or
deed-in-lieu of foreclosures—in which borrowers lose possession of the house to
be at least somewhat significant loss-mitigation steps at their banks. A large
number of respondents also indicated that their banks’ loss-mitigation
strategies will include refinancing of loans into other mortgage products at
their banks or into Federal Housing Administration (FHA) products. Finally,
about 35 percent of respondents expected streamlined loan modifications of the
sort proposed by the Hope Now alliance to be at least a somewhat significant
loss-mitigating strategy for their banks.5

Domestic respondents expect their banks to face several
potential obstacles in undertaking these loss-mitigation strategies:
Respondents anticipate difficulties in contacting borrowers, and they are
concerned with borrowers’ reduced motivation to retain possession of their
properties. To a lesser extent, respondents also anticipate difficulties
arising from a shortage of qualified loss-mitigation specialists at their
banks.

1Banks received the survey in early January, and
their responses were due on January 17. Return to text

2Fifty-three
institutions reported that they originated prime residential mortgages.
According to Call Reports, these fifty-three banks accounted for about 80
percent of residential real estate loans on the books of all commercial banks
as of September 30, 2007. Return to text

3According to Call Reports, these thirty-nine institutions accounted for about
70 percent of residential real estate loans on the books of all commercial
banks as of September 30, 2007. Return to text

4According to Call Reports, these seven institutions accounted for about 45
percent of residential real estate loans on the books of all commercial banks
as of September 30, 2007. Return to text

5Hope Now is an alliance of credit counselors, mortgage
servicers, mortgage investors, and other mortgage market participants. Further
information on Hope Now can be found at: www.hopenow.com.Return to text

This document was prepared by David Lucca with the
assistance of April Gifford, Division of Monetary Affairs, Board of Governors
of the Federal Reserve System.